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Tuesday, March 03,
2020 / 02:37 PM / FBNQuest Research / Header Image Credit: CNBC
The value of purchasing managers- indices (PMIs)
as forward-looking indicators has been proved by the light they throw on the
impact of the coronavirus. China's official manufacturing index crashed from
50.0 to a record low of 35.7 in February, and its non-manufacturing counterpart
still lower, to 29.6.
The Caixin/Markit manufacturing index slumped from
51.1 to 40.3 last month. These may remain record lows because February bore the
brunt of the control measures imposed by the government at the end of the
extended Lunar New Year.
The IMF has acknowledged
that its forecast of 6.0% growth for China this year, made in its World
Economic Outlook update in January, will have to be revised downwards in
the light of the virus. A recent poll of analysts showing consensus growth of
4.0% y/y for Q1 2020 also looks dated.
The Fund has already
trimmed its forecasts for some countries such as Nigeria.
China is Nigeria's leading
source of merchandise imports. It provided 31.3% of the total in Q3 2019
although probably more representative market shares are the 18.7% it achieved
in 2017 and 19.4% in 2018 (full years). In the event of faltering supplies, Nigerian
business could import from alternative markets. Motorcycles from India would
probably be a good example.
China is also a leading
supplier of infrastructure finance in Nigeria. Projects span from roads and
railways to airport terminals and hydroelectric dams. Exim Bank of China is the
second largest non-market external creditor of the Nigerian government after
the World Bank Group. For reasons of prestige and long-term strategy, we would
be very surprised by any halt to financing.
The greater pressure
points for Nigeria in our view, however, are the oil price (negative) and US
interest rates (likely positive). The 2020 budget assumes an average crude
price of US$57/b, and we have seen several times how a low price for an
extended period undermines exchange-rate arrangements. OPEC and its allies are
currently scheduled to meet in Vienna this week, and will be under some
pressure to extend and deepen their quota cuts.
The FOMC next meets in
mid-March, and its “appropriate†agenda will be to consider (at least) further
easing.
The Chinese statistics
board was quoted at the weekend as saying that more than 90% of larger
companies would have returned to production by the end of this month. To add
some anecdotal evidence, the two Chinese retail parks owned by an international
operator have now reopened.
Finally governments,
particularly those that are accountable to voters, have to err on the side of
caution in their response to such crises. The electoral cost of being found to
have been underprepared would be huge.
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